Figure 1
A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected.
-Refer to Figure 1. Using the initial capital investment, the accounting rate of return for the project would be

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. Here, the average annual cash inflow is £15,000, and the initial investment is £90,000. ARR = (£15,000 / £90,000) * 100 = 16.67%. However, since the question asks for the ARR using the initial capital investment, the correct calculation should be based on the net cash inflow, which is £15,000 / £90,000 = 0.1667 or 16.67%.

Figure 1 A Project Requires an Investment of £90,000 in Equipment. Annual